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2nd Cir. Mulls Insider Trading Jury Instructions

April 22 --A U.S. appeals court panel was critical of a trial judge for making it too easy to convict two hedge fund managers of insider trading, lending support to their claims that the verdict was unfair and possibly unraveling other government cases if the court rules in their favor.

Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman April 22 argued that their convictions should be overturned because the jury wasn't required to find that they knew that the source of their illegal tip received a benefit. The government said jurors only needed to find that the men knew it was material nonpublic information and that the tipper was breaching a fiduciary duty by revealing it.

A decision by the three-member panel of the U.S. Court of Appeals for the Second Circuit favoring the fund managers could imperil the conviction of SAC Capital Advisors LP fund manager Michael Steinberg whose jury was given the same instructions as Chiasson and Newman's. The financial sector should be assured innocent actions won't be criminalized by zealous prosecutors, circuit Judge Barrington Parker said at the oral argument.

“We sit in the financial capital of the world,” Parker said. The atmosphere that you have “gives precious little guidance to all the institutions, all the hedge funds, that are trying to come up with some bright line rule of what they can and can't do.”

Judge's Concerns

Parker and his colleagues, Judges Peter Hall and Ralph Winter, all expressed concern that U.S. District Judge Richard Sullivan made it too easy for the U.S. to win insider trading cases.

Sullivan instructed the jury in Chiasson's and Newman's trial that as long as prosecutors proved the defendants knew the tips they traded on weren't public and breached a fiduciary duty, they could be convicted of insider trading. He didn't tell the jury that they also must have known that the tipsters benefited.

Chiasson and Newman pointed to four other federal judges who required that jurors had to find all three elements before they could convict.

“It looks like the government is taking completely inconsistent views on a critical point of law,” Parker said. “I'm concerned that the government is taking the position in these key points of law, which seems to vary depending on which judge you're talking to.”

$72 Million Scheme

Chiasson and Newman were convicted in December 2012 of being part of a sprawling $72 million insider trading scheme in which a group of analysts and insiders swapped illicit tips about Dell Inc. and Nvidia Corp., which they funneled to their fund managers (28 CCW 282, 9/18/13).

Both declined to comment on the argument.

Steinberg's conviction, along with the conviction of former SAC Capital fund manager Mathew Martoma, were among the biggest victories for Manhattan U.S. Attorney Preet Bharara in his prosecutions of Wall Street wrongdoing, and at SAC Capitalin particular.

Steinberg's lawyer, Barry Berke, Kramer Levin Naftalis and Frankel LLP, who was in court for the appeals hearing, last year asked Sullivan to remove himself from Steinberg's case; he argued that prosecutors improperly steered the matter to a judge who made it easier to win insider trading convictions. Berke declined to comment on the April 22 hearing.

Pattern?

Just as Apps stood to begin arguing for the U.S., Parker interrupted her to raise an issue that wasn't part of the appeal--why the government chose to file Steinberg's insider trading case as a related case with Sullivan.

“I notice a pattern,” Parker said. “Can you allay concerns about what the government did to move these cases around until they could get their main case before Judge Sullivan, their preferred venue?”

Steinberg's case was viewed as a related case because Sullivan had already heard testimony from the series of cooperating witnesses who had testified in Chiasson and Newman's case, Apps responded.

U.S. District Judge Jed Rakoff, in the case of Whitman Capital LLC hedge fund founder Doug Whitman (27 CCW 363, 11/28/12); former U.S. District Judge Richard Holwell, in the case of Galleon Group LLC co-founder Raj Rajaratnam (26 CCW 157, 5/18/11) and U.S. District Judge Paul Gardephe, in the trial of SAC Capital portfolio manager Mathew Martoma, all required jurors to consider the three elements of insider trading, as opposed to the two on which Sullivan instructed the jury.

However, although the other judges in the insider trading cases have required jurors to find the extra element of personal benefit to convict, Rajaratnam, Whitman and Martoma, all were found guilty.

New Trials?

New trials could be ordered for Chiasson, who was sentenced to six-and-a-half years in prison, while Newman got a four-and-a-half year term.

Additionally, former Galleon Group LLC trader Zvi Goffer, who was convicted and jailed in 2011 for trading on tips leaked by lawyers (26 CCW 322, 10/26/11), asked the appellate court to reopen his appeal so he may advance the same claims as Newman and Chiasson. Goffer, who was tried before Sullivan, lost his appeal last year (28 CCW 213, 7/10/13).

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